The recent warnings from the SEC to Coinbase have garnered reactions and raised eyebrows from experts and concerned individuals. Last week, the Security and Exchange Commission surprised the crypto community by issuing a warning to Coinbase to suspend its Lend product, citing its security. The Lend product was designed to give users a certain return on their investments like traditional banks. However, the SEC kicked against it immediately.
Threats against lending products have been issued against crypto platforms in the United States. Although, these warnings usually came from agencies within the state level. The SEC’s offensive approach on the matter is the first coming from the commission. Experts and critics have warned that SEC’s recent approach to clean the crypto space could affect the country’s digital economy if flexible regulations aren’t established. However, the SEC maintain their stance, arguing that the size and potential growth of the digital space warrant guidelines and laws.
SEC’s Issue with Coinbase over Lend As Security
SEC’s threat against Coinbase came after the exchange’s plan to launch Lend product. The exchange giant wanted to develop a product that would give its users interest in their investments after some time. Coinbase interacted with the SEC on the lending platform and kept the commission up to date with the forthcoming market launch. However, Coinbase was left perplexed after the SEC sent a letter to the exchange, threatening a lawsuit against it.
Coinbase executive Brian Armstrong was surprised and disappointed with SEC’s letter, considering that the exchange had been in contact with the commission all through to iron out regularity mishap that could occur before the launch, slated for mid-September. The move from SEC could delay the launch indefinitely, pending the time the issue is settled.
In a Twitter thread, Coinbase countered SEC’s claim about Lend being security. According to the exchange, Lend product doesn’t bear any similarity to being an investment contract. Instead, the platform’s users will invest in USDC in their accounts, and Coinbase will pay interests to the Lend customers according to their investments.
However, the American securities law classifies lending as one, citing banks as an example of lending platforms. The SEC argues that Lend product is security because it resembles an investment contract, where customers make deposits in crypto for an expected return. As such, the commission says that Coinbase can’t launch Lend until being approved.
The confusion surrounding the commission’s interpretation of regulations about crypto lending platforms stems from the commission’s inability to state how it plans to validate Lend within the Howey and Reves Test. Coinbase also made reference to this. Marc Powers, who worked at the SEC, says that the commission will have to come up with regulations to deal with non-registered SEC entities like Coinbase that are offering crypto lending products.
Critics Slam SEC’s Approach
While the SEC might be correct about Lend being security, its approach seems out of place. What’s more? Its request for Coinbase to submit Lend customer information is a privacy violation and disrespectful. This is the same move the commission condemned when Ripple requested its employees that dealt in asset trading.
As a result, policymakers are requesting less stringent regulations that will not hamper the industry’s growth and ensure that the crypto space is rid of nefarious activities.